Regulatory or contractual hurdles affecting LNG projects

Developing a viable LNG regulatory infrastructure

A viable regulatory infrastructure for LNG projects wherever they may be located, should include:

  • effective applicable regulation, and
  • effective contractual remedies in situations where the parties are in disagreement.

This post will briefly summarise the scope of these two areas, as follows.

  • Law and regulation:

LNG regulation – what does it cover?

Let’s first draw up a shortlist of which areas of, or functions in, the LNG value chain ought to be regulated.

These areas or functions should ideally cover all of the following:

  • Regulation of gas pricing[1]
  • Access to terminals[2]
  • Regulation for the construction and operation of an LNG facility[3]
  • Regulation of the ownership and organisational structure of LNG liquefaction/export/receiving/and regasification facilities[4]

Though LNG regulation is jurisdiction-specific, and different jurisdictions will treat each of these areas a little differently, it is also clear that some jurisdictions fail to effectively regulate one or more of these areas in the LNG value chain.

In some jurisdictions there is still a lot of work to be done from a regulatory viewpoint.

(B) Contractual remedies:

Price and price review

When dealing with the sale and purchase of LNG, regulation should ideally cover the situation where the contractual pricing terms are no longer a good bargain.

In situations like this, termination of contract should not be the only available option.

Why is this of any concern to the parties to the sale and purchase of LNG? 

  • Our starting-point should be an appreciation that the LNG value chain typically involves the negotiation and use of long-term agreements for sale and purchase of LNG
  • So, the parties to an LNG SPA should ask themselves whether the SPA should contain the right to adjust or amend the pricing terms of a contract, where the circumstances warrant this – after all, there may be a marked risk of regulatory, or economic change, during the term of an SPA, these being changes which are typically unforeseeable at the time of contracting
  • The question which therefore arises is what, if anything, does the applicable governing law of contract say about price review, and price re-openers?
  • What should applicable regulation say about re-negotiation of contractual terms?

Change of law

  • Somewhat similar in scope to the subject of price review, is another common theme in any long-term project or operations, namely the many and various changes which may and indeed, are likely to occur, under the applicable regulatory regime
  • Any such change may at least potentially lead to a degree of instability and uncertainty, as the project or operations progresses[5]
  • What should the applicable regulatory framework say about change of law?

Are there effective contractual remedies for breach?

  • Under English law, the failure to ‘deliver’ or to ‘take’, in a contract for the sale of goods, will give the relevant party the right to claim damages
  • There may also be a resultant right to terminate the contract in question
  • The long-term SPA for the sale and supply of LNG, will normally provide for an obligation on the part of the buyer to accept delivery – this will correspond to the seller’s obligation to deliver
  • That said, the nature of the buyer’s obligation to take, the mechanism which enables the parties to decide whether it has been breached, and the remedies available, will typically be quite different from the equivalent issues applicable to the seller’s obligation to deliver
  • Generally, in contracts for the sale and purchase of gas, or LNG, the parties may incorporate such terms as ‘take or pay’, or ‘take and pay’ – so, for example, in an LNG master sales agreement, it may be the case that where a buyer has failed to take a cargo of LNG, the buyer is nevertheless obliged to pay for that cargo, (in some cases adding that a credit be allocated to the buyer for the value received by the seller in the event of a sale of that LNG to another buyer)
  • What does the applicable regulatory regime say about breaches of the obligation to deliver or to take?

More specifically, what contractual rights and remedies are available to the parties in a pandemic or a major economic downturn?

This is another area of great concern to the counterparties to any contract, anywhere along the LNG value chain, whether it happens to be (for example) a construction contract, a charterparty, a terminal use agreement, or an SPA.

Different jurisdictions will deal will this issue differently, but ideally the applicable law and regulation will enable the parties to raise a number of types of claim, and these may include any or all of the following:

  • Force Majeure
  • Frustration
  • Delay and Disruption
  • Breach of Contract (including Payment Default)
  • Termination

These are in my opinion a number of the necessary regulatory and legal underpinnings for effective or viable LNG operations, anywhere in the world.

If the reader would like to add to or modify any of the commentary here, please feel free to do so, using the comment tab for this post.

This post is for information purposes only. It is not intended to constitute legal advice.

JANUARY 4, 2021

[1] It helps also if the agreement between LNG buyer and seller contains some scope for re-negotiation of the contractual price.

[2] In most jurisdictions this is achieved by way of contractual forms such as the TUA.

[3] Regulation in this area may include licensing for siting and construction of an LNG plant, with due consideration as to whether this is sited onshore or offshore. Also included, will be environmental regulation, and the regulation of environmental impact statements; and ideally also, export licensing.

[4] This area will cover everything from corporate issues, such as the regulation of joint venture structures, and in particular cross-border joint ventures; to for example, the contractual structures applicable for the operation of a terminal.

[5] Trade treaties typically give the project owner the right to challenge a change in law after the project has commenced, if the overall result is effectively expropriation or discrimination.

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